The ombudsman will enforce a new groceries code of practice, which comes into force next month. Photograph: Matt Cardy/Getty Images

The government ended long-running speculation over plans for a supermarket ombudsman today by pledging to set up a new watchdog to protect suppliers and farmers from abuses of power by large retailers.

The Department for Business, Innovation and Skills said it had accepted the Competition Commission's recommendation to create the new body to monitor supermarket behaviour. But the scope and powers of the new ombudsman remain unclear, and will be determined as the result of a forthcoming consultation.

The ombudsman will enforce a new groceries supply code of practice (GSCOP), which will come into force on 4 February.

Announcing the decision, the consumer affairs minister, Kevin Brennan, said a consultation would begin next month to decide how to enforce the code and what powers the ombudsman should have.

"The revised GSCOP is a great improvement," he said. "However, the power that large grocery retailers remain able to wield over their suppliers can still create pressures on small producers, especially in these difficult economic times, which ultimately may impact on consumers.

Ministers had been expected to make a decision before Christmas but met strong resistance from the "Big Four" supermarkets (Tesco, Sainsbury's, Asda and Morrisons). Last week the Tories stole the government's thunder by announcing that they would create the new body through a levy on retailers.

Tom MacMillan, of the Food Ethics Council, said: "The government must now ensure that it listens to small producers as well as big business. A strong supermarket ombudsman, invested with real power, would have the authority to ensure fair prices from the farm gate to the checkout. It would protect the livelihoods of farmers across the UK and give consumers better access to fresh, healthy food."

The ombudsman has been championed by the National Farmers' Union who say that dairy producers have been particularly squeezed – shoppers pay up to £1.70 for two litres of milk for which the farmer receives less than 50p. War on Want says an ombudsman would also help poorly paid workers in the developing world.

However, the British Retail Consortium, speaking for the supermarkets, said the new plans amounted to a costly and unnecessary new bureaucracy that would raise prices for consumers.

Stephen Robertson, BRC director general, said: "This would tip the balance of negotiating power in favour of multinational food manufacturers, allowing them to drive up the prices customers pay. The UK grocery market is worth £130bn a year. If threats of involving an ombudsman allow big food companies to squeeze even 0.1% more out of supermarkets, that's £130m extra on customers' bills."

The Liberal Democrat environment, food and rural affairs spokesman, Tim Farron, said: "For years, Labour and the Tories have twiddled their thumbs while huge supermarkets have pushed thousands of farmers to the brink. Their response has been totally inadequate and there are serious doubts over whether these belated proposals will properly regulate the industry

."A code of practice that is not legally binding means that much will depend on how much power the ombudsman gets."

The shadow environment secretary, Nick Herbert, said: "This is a step forward but this belated announcement of further consultation is not the decisive action that consumers or the industry need. Ministers have had since April 2008 to take forward the Competition Commission's recommendation and now they still don't know what shape the Ombudsman should take. Conservatives are clear: we would establish a supermarket ombudsman to enforce the grocery supply code as a dedicated unit in the Office of Fair Trading to ensure a fair deal for producers and safeguard the consumer interest."

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